Samsung Profits Slump Along With Drop in Demand for Its Key Products

Samsung Electronics, the world's biggest smartphone and memory chip maker, reported a slump in fourth-quarter net profits on Thursday, blaming a drop in demand for its key products.

Net profits in the October-December period were KRW 8.46 trillion ($7.6 billion or roughly Rs. 54,000 crores), it said, down 31 percent year-on-year. 

The firm is the flagship subsidiary of the giant Samsung Group, by far the biggest of the family-controlled conglomerates that dominate business in the world's 11th-largest economy, and it is crucial to South Korea's economic health.

It has enjoyed record profits in recent years despite a series of setbacks, including a humiliating recall and the jailing of its de facto chief. But now the picture is changing, with chip prices falling as global supply increases and demand weakens.

It also has to contend with increasingly tough competition in the smartphone market from Chinese rivals like Huawei - which surpassed Apple to take second place last year -- offering quality devices at lower prices.

"Unfavourable business and macroeconomic factors led to slower performance in the final quarter," Samsung Electronics said in a statement, when "earnings were affected by a drop in demand for memory chips used in data centres and smartphones."

It expected demand for chips to stay weak in the January-March period, "due to seasonality and macroeconomic uncertainties".

Uncertainties over US-China trade tensions and China's sluggish economy bode ill for global electronics makers in 2019, pressuring demand for memory chips, smartphones and display panels, analysts say. But some investors are hoping for a recovery for Samsung in the second half, fueled by chip sales to data centres, the rollout of 5G wireless technology and the launch of new gadgets including its long-promised, high-end foldable smartphone.

"If Samsung's foldable smartphone becomes a hit, it will be a good factor for Samsung's shares," Park Jung-hoon, a fund manager at HDC Asset Management which holds Samsung Electronics stock, told Reuters.

The South Korean firm's chips power the handsets of most major smartphone makers, including Apple and China's market leader, Huawei. Its memory and processor chips account for about 72 percent of overall profit.

Samsung said memory demand was expected to remain weak in the first quarter before improving gradually from the second, helped by sales to cloud-computing companies. Data centres have been one of the brightest spots for the memory chip market due to the growing need for cloud computing services for the e-commerce and data analytics industries. Such demand faltered late last year, partly because some Chinese buyers seem to have bought chips earlier than usual amid fears about US-China trade tensions, according to Intel. Nvidia and Intel both recently flagged stagnating growth in data centre sales.

Samsung's chip division fell 29 percent to KRW 7.8 trillion (roughly Rs. 50,000 crores), the company said. Its mobile division logged a KRW 1.5 trillion (roughly Rs. 9,500 crores) profit, down 38 percent from a year ago. While overall smartphone sales would remain flat this year, average prices would rise as more devices were built with expensive features like multi-cameras, Samsung said.

Samsung confirmed that it will roll out foldable smartphones and 5G devices this year. Its new flagship Galaxy series will be unveiled next month, but no date has been set for the launch of the foldable device. The South Korean giant has been struggling to defend its top rank in the global smartphone market against competition from Chinese rivals like Huawei, which last week said it could overtake Samsung this year.

It said it was "reorganising" its mass-market line-up "to better promptly respond to rapid changing market trends and the needs of target customers". While it leads the global smartphone market with a 20 percent share, "Samsung is losing ground to Huawei, Xiaomi and other Chinese rivals in the huge China and India markets", Neil Mawston of Strategy Analytics said in a report after the South Korean firm flagged the figures earlier this month.

In a bid to attract consumers in China, Samsung launched a series of mid-range phones last year, including the Galaxy A6s priced around $200 (roughly Rs. 14,000) and designed by a Chinese manufacturer, which the company said it had never done before.

But that did little to restore its sales in the world's largest smartphone market, where it once had a 20 percent share but has seen that tumble to less than one percent in the third quarter. Last month, it announced the closure of its factory in Tianjin.

Samsung is not the only tech giant troubled by weak Chinese sales. Apple said in an earnings report Tuesday that its revenue plunged almost 27 percent in the Greater China region in the most recent quarter.

The company's display businesses, it said, would be hit by "slow sales of premium smartphones", increasing competition, and "large-scale capacity expansions in the industry".

For the full year 2018, the firm reported record net profits of KRW 44.3 trillion, up 5.1 percent year-on-year. But it projected overall earnings to fall this year, "due to weaker performance by the memory business".

Written with agency inputs